Thank you, Mr. Chair.

Canadians for Tax Fairness welcomes this important step to make our tax system more fair. These changes to capital gains taxation will lessen inequality and raise revenue that can be used to fund important public services, new affordable housing and a just transition.

As you're all aware, currently only 50% of capital gains is subject to income tax, while in contrast, 100% of income from employment is taxable. As the Carter commission noted, this differential taxation leads to, “an enormous incentive for the taxpayer to try to transform 'income' gains into 'capital' gains.”

This creates uncertainty for taxpayers and inequities in the tax system. This measure would be a step towards closing this loophole.

Who currently benefits from the exclusion of 50% of capital gains from taxation? According to data from the Longitudinal Administrative Databank, over half of personal capital gains accrue to the top 1% of market income earners each year and over one quarter of capital gains accrue to the top 0.1%. This means that the top 1% of income earners benefit over 250 times more from the current reduced inclusion rate on capital gains than the average Canadian.

As Ms. Bruske mentioned, a recent report we co-authored with the CCPA showed that when all taxes are taken into account, including sales taxes, these top earners have the lowest tax burden of all Canadians, in part due to this capital gains exemption.

This measure also affects the inclusion rate on corporate capital gains, which will be increased to two-thirds, and this measure will largely affect the largest corporations. Among non-financial industries, real estate corporations earn the most capital gains. This was over $23 billion in 2022, so this measure will reduce the incentive for large firms, such as real estate firms, to use their income for passive investments, incentivizing instead investments in new jobs, buildings, machinery and equipment.

Of course, this measure is not new in Canadian history. From 1988 through 2000, the capital gains inclusion rate was at least two-thirds, and for most of this period, it was actually 75%. In contrast to concerns being raised that raising the rate could decrease productivity, there was no drop-off in productivity or business investment during this previous period with a higher capital gains inclusion rate. In fact, relative to the early 1980s, business investment actually increased during the period with a higher capital gains inclusion rate. Moreover, a recent report showed that rates of labour productivity growth, which are the subject of much discussion today, were higher during the 1990s than they are today, under the lower capital gains inclusion rate. That is not to say that this change is going to increase investment or productivity, just that there is little relation between capital gains rates, tax rates, business investment and labour productivity.

On the other hand, we know that the revenue raised through this measure can be used to fund much-needed public investments in housing and a just transition. Award-winning economist Mariana Mazzucato has convincingly shown over the past decade that targeted, mission-driven public investment in sectors like renewable energy actually incentivizes private investment in the same sectors. This measure will allow us to democratically decide how and where to direct these much-needed investments.

We also know that this measure will, at least to a limited extent, work to combat income inequality, given its targeted nature at top earners. Combatting inequality is an important end in and of itself. There is even evidence that income inequality is linked to lower productivity since low wages can make workers unmotivated. Moreover, decades of research have shown that across countries, higher inequality is correlated with lower life expectancy, higher homicide rates and more school bullying, among other negative outcomes. We need to remember that the economy is just one part of the larger society we live in.

More new work needs to be done to address income inequality in Canada and ensure that resources are more equitably distributed, not only through the tax system, but through measures that affect the pre-tax income distribution. However, this change to capital gains taxation is one small step towards improving tax fairness and reducing inequality without a discernible effect on investment.

Thank you.